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Market structure presentation 2

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AP Economics w/ Gabriel Swarts, 2014

AP Economics w/ Gabriel Swarts, 2014

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  • 1. Market Structure PERFECT COMPETITION, MONOPOLISTIC COMPETITION, OLIGOPOLY, AND MONOPOLY By Manet Ramsey Nelson 1Thursday, April 3, 14
  • 2. Market Structure: Introduction Market structure is the configuration of an industry. The term actually refers to the number of firms producing theoretically homogeneous products. But when that number grows or shrinks, its effect on the market is so severe that classification of the resulting structures is in order. 2Thursday, April 3, 14
  • 3. the categories Market structure is primarily made up of four categories, each with distinctive characteristics. These categories are known as--in order of the implied number of firms, from greatest to least-- perfect competition, monopolistic competition, oligopoly and monopoly. 3Thursday, April 3, 14
  • 4. Perfect Competition Mansfield: it is defined by requirement of four conditions: Krugman et al: “price equals marginal cost at the price-taking firm’s optimal quantity of output.” Stigler: “[perfect competition] will prevail when there are indefinitely many traders . . . acting independently in a perfect market.” Perfect competition requires that “the product of any one seller be THE SAME as the product of any other seller.” Also, every participant in the market, “whether buyer or seller,” must be a PRICE-TAKER. “Third, perfect competition requires that ALL resources be COMPLETELY MOBILE.” “Fourth . . . consumers, firms, and resource owners [must] have PERFECT KNOWLEDGE . . .” i.e. -- (Within the market) all products must be homogeneous, all participants must be price-takers who have perfect knowledge, and all resources must be able to easily and quickly switch owners. 4Thursday, April 3, 14
  • 5. Sources (Perfect Competition) Mansfield, Edwin. Microeconomics: Theory and Applications. 3rd ed. London: Norton and Company, 1970. Print. Pages cited: p. 249, 250, on the “Four Conditions” required of perfectly competitive markets. Ray, Margaret, David Anderson, Paul Krugman, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers, 2011. Print. Page cited: p. 585, on “the price-taking firm’s optimal output rule.” Stigler, George J. "Perfect Competition: Historically Contemplated." Microeconomics: Selected Readings. 3rd ed. Ed. Edwin Mansfield. Portsmouth: Heinemann, 2000. 24-34. Page cited: p. 184, on the definition of “perfect market competition.” School of Business Administration. The University of North Carolina at Pembroke, n.d. Web. 29 March 2014. Image cited: Graph of a firm in a perfectly competitive market, taken from an exam. 5Thursday, April 3, 14
  • 6. monopolistic competition Hart: “[monopolistic competition] may be defined as a situation where (1) there are many firms producing differentiated commodities; (2) each firm is negligible, in the sense that it can ignore its impact on, and hence reactions from, other firms; (3) free entry leads to zero profit of operating firms; but (4) each firm faces a downward-sloping demand curve and hence equilibrium price exceeds marginal cost.” Krugman et al.: “Because each firm is offering a distinct product, it is in a way like a monopolist. . . . However, unlike a pure monopolist, a monopolistically competitive firm does face competition: the amount of its product it can sell depends on the prices and products offered by other firms in the industry.” Mansfield: “The long-run equilibrium position is the point where (1) the long-run average cost curve . . . is tangent to the dd’ demand curve, and where (2) the DD’ demand curve intersects the DD’ demand curve and the [long-run average cost curve] at the tangency point.” According to Mansfield, “dd’ demand curves” are those that “[show] how much the firm will sell if it varies its price from the going level and if other firms maintain their existing prices,” while “DD’ demand curves” are “based on the suppositiong that all firms raise or lower their prices by the same amount as this firm.” 6Thursday, April 3, 14
  • 7. Sources (monopolistic Competition) Hart, Oliver D. “Monopolistic Competition in the Spirit of Chamberlin: A General Model.” Review of Economic Studies (1985): 529-546. Web. 29 March 2014. Page cited: p. 529, on the Chamberlinian definition of monopolistic competition Ray, Margaret, David Anderson, Paul Krugman, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers, 2011. Print. Page cited: p. 659, an introduction to monopolistic competition Mansfield, Edwin. Microeconomics: Theory and Applications. 3rd ed. London: Norton and Company, 1970. Print. Pages cited: p. 316-320, under the headings “Demand Curves under Monopolistic Competition” and “Equilibrium Price and Output in the Long Run” and p. 329 on opposition to the theory of monopolistic competition (cited extensively in discussion) The photographs of Joan Robinson and Edward Chamberlin used on slide 10 (under the “History” heading in discussion) both can only be cited as n.a. (no artist or photographer), n.t. (no title of artwork), photography, n.d. These are the URLs from which the images used here were downloaded. Joan Robinson’s image. Web. 30 March 2014. <http://econwikis- mborg.wikispaces.com/Joan+Robinson> Edward Chamberlin’s image. Web. 30 March 2014. <http:// www.wisdomsupreme.com/dictionary/edward-chamberlin.php> 7Thursday, April 3, 14
  • 8. Oligopoly Robert Dorfman An oligopoly is a market in which there are a few firms, each of which recognizes that its actions have a significant impact on the price and supply of the commodity. krugman et al. firms are interdependent when the outcome (profit) of each firm depends on the actions of the [small number of] other firms in the market. shubik [poker games and “the situation of two firms in an advertising campaign”] obviously have a common core. Shubik Martin Shubik refers to game theory, which price-making oligopolists must utilize. 8Thursday, April 3, 14
  • 9. Sources (Oligopoly) Ray, Margaret, David Anderson, Paul Krugman, and Robin Wells. Krugman’s Economics for AP. 3rd ed. New York: Worth Publishers, 2011. Print. Page cited: p. 638, on interdependence in oligopolistic markets. Shubik, Martin. “The Uses of Game Theory in Management Science.” Microeconomics: Selected Readings. 3rd ed. Ed. Edwin Mansfield. Portsmouth: Heinemann, 2000. 24-34. Page cited: p. 291, on the elements of game theory. Dorfman, Robert. Prices and Markets. 2nd ed. Englewood Cliffs: Prentice-Hall, 1972. Print. Image cited: Graph of a firm in a perfectly competitive market, taken from an exam. 9Thursday, April 3, 14
  • 10. monopoly Dorfman: A monopoly is a market in which all or virtually all of the commodity is produced by a single seller. Mansfield: . . . a firm may become a monopolist because the average cost of producing the product reaches a minimum at an output rate that is big enough to satisfy the entire market at a price that is profitable. . . . Cases [like these] are called natural monopolies. While monopolies are usually considered generally bad for an economy, mostly because of the deadweight loss created by loss of consumer surplus and, if the demand product is very inelastic, the potential for abuse of monopolist’s unlimited price-making power abounds—what if the monopoly is efficient in the sense that any other business’s entry would only create a market surplus? Laws about “natural monopolies” are controversial this way. Krugman et al.: [A monopoly’s] demand curve is simply the market demand curve, which slopes downward . . . This downward slope creates a “wedge” between the price of the good and the marginal revenue of the good. Krugman talks here about the deadweight loss (on graphs, the wedge) in monopolistic markets, which actually disappears money or at least its value (see Module 9 of Krugman’s book, which first introduces its readers to the concept of deadweight loss). But unlike the quota-rent opportunity cost example that module describes, the wedge created in monopolistic markets involves loss of consumer surplus. 10Thursday, April 3, 14
  • 11. Sources (monopoly) Ray, Margaret, David Anderson, Paul Krugman, and Robin Wells. Krugman’s Economics for AP. 3rd ed. New York: Worth Publishers, 2011. Print. Pages cited: p. 608-609, on wedges and demand curves in monopolistic markets. Mansfield, Edwin. Microeconomics: Theory and Applications. 3rd ed. London: Norton and Company, 1970. Print. Page cited: p. 281, on the cases of natural monopolies. Dorfman, Robert. Prices and Markets. 2nd ed. Englewood Cliffs: Prentice-Hall, 1972. Print. Page cited: p. 145, on the definition of monopoly 11Thursday, April 3, 14
  • 12. The metric system: An overview These example industries are judged against the criteria for their market structure with Mark-Struc-A-Meters. The meters used to judge perfect competition and monopoly are more more lenient because those market structures are much rarer in real life. The Mark-Struc-A-Meters are as follows: Perf-Comp-A-Meter Passing grade: 50% (“perfectly competitive within the boundaries of this universe”) Mono-Comp-A-Meter Passing grade: 75% (“sounds like monopolistic competition to students who don’t read their textbooks”) Olig-A-Meter Passing grade: 75% (“sounds like oligopoly to people who read the New York Times but not their textbooks”) Mono-A-Meter Passing grade: 50% (“monopolistic within the boundaries of this universe”) 12Thursday, April 3, 14
  • 13. Example of Perfect Competition: The happy, flappy, tappy Market This booming market is famous for the overwhelming youth of its developers, consumers, and the industry itself. The favored marketplace is the iTunes App Store, where new developers can enter the market with only a few clicks, but the software is bought and sold across the entire internet. Note: Yes, this is the specific market for Flappy Bird copycat games, which sells products that are almost perfectly homogeneous. 13Thursday, April 3, 14
  • 14. and how is The happy flappy tappy Market perfectly competitive? Is there an indefinite number of traders? Acting independently? In a perfect market? Does it satisfy Mansfield’s four conditions? Are the products sold within it homogeneous? If not perfect, are they at least close substitutes? Are all participants in the market price-takers? Are all resources completely mobile? Do all participants have perfect knowledge? Have all firms in the market decided upon the same price for their similar commodities, adjusted only for production costs? 14Thursday, April 3, 14
  • 15. Is there an indefinite number of traders? Acting independently? In a perfect market? Does it satisfy Mansfield’s four conditions? Are the products sold within it homogeneous? If not perfect, are they at least close substitutes? Are all participants in the market price-takers? Are all resources completely mobile? Do all participants have perfect knowledge? Have all firms in the market decided upon the same price for their similar commodities, adjusted only for production costs? What are those prices? The amount of traders in this industry is astronomical. Yes, they seem to be. No, none have perfect knowledge. To an extent. No, there is some variation among the software sold. Yes, the Flappy Bird copycat games run on the same game mechanisms as the original’s. Yes. Yes (completely!), because every transaction is digital and programmers may work from home. No, but only due to the incredible variety of options. Yes--firms sell products at seemingly preset prices. The amount of coding involved is the only production cost in a purely digital market. Games developers offer simple Flappy Bird copies for free, but charge 0.99 for something slightly more complex (“Customize Flappy Textbook with over 80 different skins!”) and 3.99 for a much more complicated game (“Flappy Textbook Lost in Space”). 2 / 3 2. 5 / 4 1 15Thursday, April 3, 14
  • 16. Conclusion: The happy flappy tappy Market is 68.75% perfectly competitive. It scored 5.5 points out of 8 on the Perf-Comp-A- Meter. This is actually pretty good, considering how unrealistic the theory of perfect competition actually is! This industry is now declared perfectly competitive within the boundaries of this universe. Admittedly, it may be monopolistically competitive in a more technical sense, because the products within it are actually differentiated; however, Flappy Bird “remixes” are much closer substitutes than products within textbook monopolistically- competitive markets, so this real-life market is closer to theoretical perfect competition than it is to imperfect competition. 16Thursday, April 3, 14
  • 17. Inside the online games market: isTom Games is a Hungarian developer and publisher of game applications for iOS/iPhone. Their games include Tappy Nyan, a member of the perfectly competitive sub-market for Flappy Bird copycats. It is available as freeware, due to the market-wide equilibrium price for this good; a perfectly inelastic demand curve prevents isTom Games from charging anything above $0 USD for the Tappy Nyan app. 17Thursday, April 3, 14
  • 18. Example of monopolistic Competition: The western comics market Note: “The Western market” refers to comics whose art does not fit within Japanese anime/manga styles, regardless of the actual nationality of its creators. It is usually classified as a separate market, because most comics readers prefer one style. The internet has recently transformed this industry into one with much easier entry; with a lot of time, a scanner and a domain name, practically anyone can begin a webcomic today, and successful webcomics can switch to print with a guaranteed fanbase. Before this century, the long- established giants D.C. and Marvel practically owned the entire industry as an oligopoly; in stark contrast, the 2013 market revenue shares of D.C. Comics and Marvel comics were 30.33% and 33.50% respectively. (Source: BleedingCool.com, “Marvel Takes 2013 Market Share Prize — But Not By Much.”) Their new competition, obviously, was composed of hundreds of young artists working individually or in tiny firms to share their graphic stories. 18Thursday, April 3, 14
  • 19. and how is The western comics Market monopolistically competitive? Does it fit Hart’s four situational conditions? Are there many firms producing differentiated commodities? Is each firm a negligible price-taker? Does free entry lead to zero profit of operating firms? Does each firm face a downward-sloping demand curve? So that equilibrium price exceeds marginal cost? Does the amount of its product a firm can sell depend on the prices and products offered by other firms in the industry? Does the demand curve for a single firm’s products differ from the demand curve for the entire market? 19Thursday, April 3, 14
  • 20. Does it fit Hart’s four situational conditions? Are there many, many firms in the market? Each producing differentiated, possible trademarked commodities? Is each firm a negligible price-taker? Does free entry lead to zero profit of operating firms? Does each firm face a downward-sloping demand curve? So that equilibrium price exceeds marginal cost? Does the amount of its product a firm can sell depend on the prices and products offered by other firms in the industry? Does the demand curve for a single firm’s products differ from the demand curve for the entire market? 3/4 Yes, the Internet makes entry into the market incredibly simple. Yes, the creative process should be unique to each comic. NO. The industry’s giants can charge much higher prices. Yes. Yes, even webcomics (who make profit off of hosted advertising, which readers hate nearly as much as spending money). Yes, for firms making profit. Yes. For example, comics new to print appearing in stores will not sell if not for less than Marvel’s well-established stories. Yes, because consumers prefer certain comics and art styles over others. 3 / 4 2 / 2 20Thursday, April 3, 14
  • 21. Conclusion: The Western Comics Market is 83.33% monopolistically competitive. It scored 5 points out of 6 on the Mono-Comp-A-Meter, giving it a grade considerably above the meter’s passing grade of 75%. Hence, this industry is now declared officially the kind that sounds like monopolistic competition to students who don’t read their textbooks, which is (im)perfectly (competitive and) okay. 21Thursday, April 3, 14
  • 22. Inside the online games market: Wayward Sons: Legends is a full-page sci-fi comic appearing both online (at www.waywardsons.keenspot.com) and in print. The comic follows the crew of the Ulympea, intergalatic jailguards who had been escorting the Tytan—a prison ship supposed to banish millions of criminals to another dimension —when the ship’s Star Core malfunctions, wrecking both ships on Planet Earth and mutating their populations. The Ulympeans and Tytans soon find out that in addition to new powers, they are all now nearly immortal, allowing for the struggle between their groups to inspire every myth and legend in human history. The comic is scripted and lettered by Benny R. Powell (aka wizbenny) and its art is created by Twinkle Planet Studios, a trio consisting of Weilin Yang, Youjun Yang, and Kun Song (who pencil, ink and color respectively). The positive critical responses to Wayward Sons often mention its well-written female characters, calm portrayal of LGBT relationships (ex. Andorra and Cassie), emotional seriousness, and historical accuracy. All of these are politically progressive traits found almost never in comics by D.C. Comics and still rarely in those from Marvel Comics. 22Thursday, April 3, 14
  • 23. Example of oligopoly: The health insurance market A 2009 article titled “The Health Insurance Oligopoly” by Julie Robinsky on CNBC.com speculated on then-emerging healthcare oligopolies, but never mentioned Obama’s health insurance plan for the country as she wrote only during his first year in office. But in “America’s Coming Health Care Oligopoly,” published on Forbes.com in 2010, Merrill Matthews blamed the nasty trend (“A recent study by the American Medical Association found that in nearly half the states, two health insurers covered 70% or more of the population,” one quote reads) on Obamacare. The controversy continues today. This past Monday, Slate online magazine published an article arguing FOR oligopoly as a method with which to save Obamacare. The authors, André Veiga and E. Glen Weyl, argue that “free competition can easily ruin insurance markets,” supporting their statement with the thought experiment “If almost all healthy people opt for bronze, as preliminary numbers suggest is likely, leaving the older and sicker in platinum, the cost of platinum plans will become prohibitive because the health care costs of the sick are so high. This would drive the platinum plans out of the market, leaving only .bronze. [sic]” So why does that mean, according to another direct quote, “we need an Obamacare oligopoly”? It seems that Veiga and Weyl wanted more government control of this economy, while the previously quoted Matthews hated it as much as he did oligopolies: he considered most oligopolies to be the inefficient results of poor government investment choices. Yes, there is an oligopoly in this market; the controversy is only about who’s responsible for it. 23Thursday, April 3, 14
  • 24. and how is The health insurance Market oligopolistic? Are there only a few firms in the market? Each of which is a price-maker? And recognizes their impact on the price and supply of the commodity? Are the firms interdependent? Does the profit of each firm depend on the actions of their competitors? Do these oligopolists use game theory to strategize? 24Thursday, April 3, 14
  • 25. Are there only a few firms in the market? Each of which is a price-maker? And recognizes their impact on the price and supply of the commodity? Are the firms interdependent? Does the profit of each firm depend on the actions of their competitors? Do these oligopolists use game theory to strategize? Yes Yes Assumedly so Yes Yes, because all firms in the market produce substitute goods. It’s certainly applicable, though doubtful that they utilize it. 3 / 3 2 / 2 1 25Thursday, April 3, 14
  • 26. Conclusion: The health insurance Market is 100% Oligopolist. It scored 6 points out of 6 on the Olig-A-Meter, which means it’s very much oligopolist, except it could still be declared officially “sounds like oligopoly to people who read the New York Times but not their textbooks.” 26Thursday, April 3, 14
  • 27. Inside the Healthcare insurance market: BlueCross gained a media frenzy in 2009 when the Washington Post exposed its cases of devastating “rescission,” along with those of many other healthcare providers. According to the article by Karl Vick (“As ‘Rescissions’ Spawn Outrage, Health Insurers Cite Fraud Control) Blue Cross abruptly cancelled the coverage for a Los Angeles woman after she was diagnosed with a thyroid disorder, fluid in the heart, and lupus, leaving her with $25,000 in medical bills. Blue Cross had also stigmatized the woman for commitment of fraud on a health questionnaire for not listing those conditions (which she didn’t know she had at that time), which made her also unable to find medical coverage elsewhere. These unethical practices were carried out in 2006 and 2008, long before talk of Obamacare—but nonetheless, they probably contributed a great deal to future votes about the subject of healthcare. Even with the semi-public healthcare complete with glitching websites that we’ve recently received, many people today are still victim to rescission from insurance companies like BlueCross. 27Thursday, April 3, 14
  • 28. Example of monopoly: The ykk zipper monopoly The letters “YKK” stand for Yoshida Kōgyō Kabushiki Kaisha, which translates to “Yoshida Manufacturing Shareholding Company.” YKK produces multiple kinds of fasteners and architectural products, but has had the most success with zippers. YKK’s success can possibly be attributed to its early acquisition of the advanced machinery, which significantly lowers their production costs. The chain machine YKK first bought was actually from the United States. The YKK Group remained the world-wide market leader for zipper manufacturing in 2013. (www.CompaniesandMarkets.com, “Global zip fasteners market recovers in 2013 with YKK remaining the market leader.”) 28Thursday, April 3, 14
  • 29. and how is the zipper industry monopolistic? Is all of the commodity produced by a single seller? Or virtually all of it? Is the market’s demand curve downward-sloping (NOT perfectly elastic)? Does this slope create a “wedge”? Between the price of the good and the marginal revenue of the good? 29Thursday, April 3, 14
  • 30. Is all of the commodity produced by a single seller? Or virtually all of it? Is the market’s demand curve downward-sloping (NOT perfectly elastic)? Does this slope create a “wedge”? Between the price of the good and the marginal revenue of the good? Not all of it Virtually all, yes. Yes; it is the market demand curve. Yes Yes 1/ 2 4/ 5 30Thursday, April 3, 14
  • 31. Conclusion: The zipper industry is 80% Monopolist. It scored 4 points out of 5 on the Mono-A-Meter, which is well above a passing grade, so it’s now declared monopolistic within the boundaries of this universe. I originally wanted to do this part of the project with the Medici monopoly on alum mining, but I felt a historical example would be too much of a risk (regarding my grade), because I wasn’t actually sure if they were allowed. 31Thursday, April 3, 14
  • 32. Market Structure but this topic is much, much broader, so check out some of the books cited in the source pages. and i’d say that’s all there is to 32Thursday, April 3, 14